Understanding Financial Accounts

Annotation Understanding Financial Accounts seeks to show how a range of questions on financial developments can be answered with the framework of financial accounts and balance sheets, by providing non-technical explanations illustrated with practical examples: What are the basic principles, concepts and definitions used for this framework which is part of the system of national accounts? What sources and which methodologies are used for their compilation? How are these used to monitor and analyse economic and financial developments? What can we learn about the 2007-2009 economic and financial crisis when looking at the numbers provided in this framework? What can we learn about financial risks and vulnerabilities? This publication is intended for young statisticians, students, journalists, economists, policy makers and citizens, who want to know more about the statistics that are at the heart of the analysis of financial developments in OECD economies Foreword Table of contents Acknowledgements Executive summary A brief overview of financial accounts and balance sheets 1. Financial accounts and balance sheets: a lively and pertinent matter Figure 1. Gross general government debt 2. A rich and stimulating history 3. Common misconceptions and interpretation errors 4. Overview of this book References Chapter 1. Financial accounts and balance sheets within the System of National Accounts 1. Introduction 2. Overview of financial accounts and balance sheets within the System of National Accounts The sequence of accounts Figure 1.1. Sequence of accounts in the 2008 SNA Figure 1.2. Balance sheet example for the non-financial corporations’ sector Recording flows and stocks Figure 1.3. Receipt of wages by the employees of a non-financial corporation Figure 1.4. Purchase of a debt security by a household Figure 1.5. Purchase of a newly-built dwelling with a mortgage loan by a household Alternative presentations Table 1.1. From-whom-to-whom matrix for long-term loans, Netherlands, 2014 Figure 1.6. From-whom-to-whom information for net lending transactions, Australia, fourth quarter 2016 Figure 1.7. Alternative measures of household disposable income, Australia, 2006-16 3. Institutional sectors Non-financial corporations Financial corporations General government Households Non-profit institutions serving households (NPISH) Total economy Rest of the World Alternative sectoring 4. Financial instruments Financial assets and liabilities Table 1.2. Detailed descriptions of financial instruments Limitations of the financial instrument classification 5. Accounting rules Recognition of assets and liabilities Table 1.3. Various sources of government obligations Valuation Box 1.1. Impact of different valuations on government debt measures Figure 1.8. General government debt securities: market value versus nominal value, as a percentage of GDP, 2007 and 2013* Table 1.4. Valuation principles according to the 2008 SNA, by financial instrument Consolidation International accounting standards 6. Statistical guidance, data sources and compilation methodology Statistical standards and guidance manuals Table 1.5. Summary of statistical standards and guidance manuals Data sources Compilation process Key points Notes References Chapter 2. The role of financial markets 1. Introduction 2. Financial markets in the 2008 SNA Figure 2.1. Illustration of relationships in financial markets Types of financial markets Figure 2.2. Types of financial markets Table 2.1. Australian equity market Table 2.2. Total bond market, Australia Figure 2.3. Holding sectors of the Australian bank money market securities Figure 2.4. Geographical distribution of global foreign exchange market turnover Table 2.3. Australian bank deposit market Table 2.4. Australian loan market Table 2.5. Total equity, Australian investment fund market Demand for credit Table 2.6. Australian demand for credit and credit outstanding by non-financial sectors Figure 2.5. Australian demand for credit by non-financial sectors Box 2.1. Australian financial markets – data sources 3. Financial intermediation Role of financial intermediation and intermediaries in financial markets Expansion of the “core” financial intermediation in financial markets 4. Interconnectedness between sectors Table 2.7. FWTW table for transactions in debt securities Table 2.8. FWTW table for stocks of debt securities Figure 2.6. Debt securities: exposure to the other institutional sectors Figure 2.7. Flow of funds chart Net flows Box 2.2. Changing economic patterns through the flow of funds – example for Portugal 5. Risk elements within the financial system Financial intermediaries – risk and maturity transformation Key points Notes References Chapter 3. The role of financial corporations in the financial system 1. Short overview Table 3.1. The financial corporations’ sector and its subsectors Figure 3.1. Relative size of financial corporations by subsector, 2016 Figure 3.2. Sector shares in total financial assets and liabilities, Euro Area, 2016 Figure 3.3. Sector shares in total value added and total compensation of employees, Euro Area, 2016 2. The Central Bank Figure 3.4. Summary of central banks’ functions Creating money and conducting monetary policy Box 3.1. Non-standard measures adopted by central banks Lender of last resort Bank of the government Centre of the payments system Central bank’s integration within the financial accounts and balance sheets Figure 3.5. Stylised central bank balance sheet Figure 3.6. Central bank balance sheets – total assets 3. Deposit-taking corporations apart from the central bank The institutional setting of deposit-taking corporations Deposit-taking corporations as issuers of monetary liabilities Table 3.2. Monetary aggregates and financial instruments in the financial accounts and balance sheets in the Euro Area Deposit taking corporations as main suppliers of credit and core to the transmission mechanism of monetary policy Deposit-taking corporations from the perspective of the financial accounts Table 3.3. Financial account balance sheets of other depository corporations in OECD countries*, 2015 Figure 3.7. Some key ratios of deposit-taking institutions across OECD countries, 2007-14 4. Money market funds Box 3.2. The transformation of the banking sector and the 2007-09 economic and financial crisis 5. The increasing role of other financial institutions (OFIs) Figure 3.8. Net transactions in loans for MFIs and OFIs in the United States and the Euro Area, 1999-2016 Figure 3.9. OFI balance sheet developments compared to MFIs and ICPFs, OECD countries,* 2007-15 Non-MMF investment funds (IFs) Other financial intermediaries Figure 3.10. Balance sheet developments of other financial intermediaries, investment funds (IFs) and financial vehicle companies (FVCs) in the Euro Area, 1999-2016 Captive financial institutions and money lenders Financial auxiliaries 6. Insurance corporations and pension funds Insurance corporations Non-life insurance including reinsurance Figure 3.11. The insurance business – a workflow example Life insurance Figure 3.12. Density of life insurance in OECD countries, 2015 Pension funds Box 3.3. The role of insurance and pension funds as institutional investors Figure 3.13. Total assets held by insurance corporations and pension funds in OECD countries, 2007-16 Figure 3.14. Composition of assets held by insurance corporations and pension funds in OECD countries,* 2007-16 7. Analysing the financial corporation sector Advantages of a comprehensive presentation of the financial sector Cross-country comparability Aggregate leverage and equity ratios of the financial sector and sub-sectors Financial inter-linkages between sectors Key points Notes References Chapter 4. Households and their financial behaviour 1. Households as consumers, entrepreneurs, investors and net lenders Measuring transactions and positions of households Role of households Figure 4.1. Final consumption of households Figure 4.2. Household financial and non-financial investment of selected OECD countries Figure 4.3. Household wealth in equity, 2015 Box 4.1. Moving from (accumulated) flows to stocks Table 4.1. Summary of changes in stocks Figure 4.4. Changes in household financial wealth: contribution of financial transactions versus other changes in assets, 1995-2014 Figure 4.5. Net lending for households consistently being net lenders, 1995-2014 Figure 4.6. Net lending for households changing from net lenders to net borrowers, and vice versa, 1995-2014 Figure 4.7. Net lending for households as nearly-consistent net borrowers, 1995-2014 2. The interlinkages between income, saving, financial and non-financial investments, and debt Figure 4.8. The sequence of accounts and its interlinkages Figure 4.9. Alternative presentation using total resources and total uses of funds Figure 4.10. Savings ratio, disposable income and net financial assets in EU countries Figure 4.11. Level and composition of households’ financial assets* Household financial behaviour in an ageing society The main counterparties of households Figure 4.12. The interconnections between sectors for Austria, end of 2016 A more detailed analysis of household debt Figure 4.13. Debt and debt service ratios of households in OECD countries, 2016 The Three Equation Model Figure 4.14. The Three Equation Model for housing and debt Box 4.2. Some indicators from the household sector’s financial accounts and balance sheets, used by international organisations 3. Distributional aspects of wealth and going beyond households’ economic well-being Linking macro-economic statistics and micro-data on distribution Beyond financial accounts and balance sheets: households’ well-being Figure 4.15. The interrelations between national accounts and broader measures of well-being Key points Going further Captured “residually” – Data sources for households in financial accounts and balance sheets Table 4.2. Summary of data sources for financial instruments Notes References Chapter 5. The financing of non-financial corporations 1. The role of non-financial corporations in the economy and in financial markets Non-financial corporations’ role as producers of goods and services Table 5.1. Non-financial corporations’ output to total output, 2014 Non-financial corporations’ role in investment Table 5.2. Non-financial corporations’ gross fixed capital formation to total gross fixed capital formation, 2014 Non-financial corporations’ role as an investment vehicle: net borrowing and net lending Box 5.1. Non-financial corporations’ net lending and investment trends in Canada Figure 5.1. Net lending/net borrowing and net operating surplus of non-financial corporations, Canada Figure 5.2. Net operating surplus and non-financial investments of non-financial corporations, Canada The financial behaviour of non-financial corporations 2. Sources and uses of funds for non-financial corporations Table 5.3. Sources and uses of funds, Canada and the U.S. Uses of funds by non-financial corporations Table 5.4. Non-financial assets held by non-financial corporations, 2014 Table 5.5. Selected financial asset transactions, Canadian non-financial corporations Box 5.2. Dead money in Canada, the US and elsewhere Figure 5.3. Liquid assets of Canadian non-financial corporations Sources of funds for non-financial corporations Figure 5.4. Internal sources (gross saving) and external sources (change in liabilities) of funds of non-financial corporations in Germany and the United States Figure 5.5. Net equity issuance and growth in real GDP, Canadian non-financial corporations Table 5.6. Debt raised on money and capital markets, Canadian non-financial corporations Figure 5.6. Loans and debt securities, short-term versus long-term, 2014 Box 5.3. Data sources and methodology for non-financial corporations Table 5.7. Basic sources of data to construct the non-financial corporations’ sector 3. Capital gains in the non-financial corporations’ sector Figure 5.7. Changes in the market value of Canadian non-financial corporations’ sector equity – revaluations versus transactions 4. The financial position of non-financial corporations: balance sheets Non-financial assets Financial assets Table 5.8. Canadian non-financial corporations’ holdings of financial assets Box 5.4. From-whom-to-whom details and the G-20 Data Gaps Initiative Liabilities Figure 5.8. Loans versus debt securities of non-financial corporations, 2015 Figure 5.9. Non-financial corporations’ liquidity ratio, Canada Figure 5.10. Non-financial corporations’ leverage, Canada Equity and net worth: a key difference between national and corporate accounting Figure 5.11. Net asset value versus equity (market value) for non-financial corporations in Canada Figure 5.12. Tobin’s q for the non-financial corporations’ sector in Canada Box 5.5. Key financial indicators of non-financial corporations 5. Globalisation, foreign direct investment and non-financial corporations Box 5.6. Foreign control of the Canadian economy – non-financial corporations’ sector Table 5.9. Share of value added in manufacturing generated by foreign controlled firms, selected OECD countries Key points Going further National accounting and business financial accounting Presentation Valuation of assets and liabilities Adjustments to assets-liabilities: provisions Equity and net worth Coverage and classification Notes References Chapter 6. Deficit and debt of general government and public sector 1. Delineating the government sector General government versus public sector Table 6.1. The public sector and its relation to institutional sectors Table 6.2. Criteria for classification of units Difference between budgetary and statistical presentations 2. Key financial accounts indicators for general government/public sector Net lending/net borrowing Figure 6.1. General government net lending/net borrowing for G7 countries, 2000-17 Financial assets Figure 6.2. Total general government financial assets, 2000-16 Figure 6.3. Composition of general government financial assets, by instrument, 2000-16 Debt Figure 6.4. Composition of general government (EDP) debt, by instrument, 2000-16 Table 6.3. Consolidated gross government debt for Canada at nominal value, 31 December 2016 Figure 6.5. General government gross debt, 2000-17 Net (financial) worth/debt Figure 6.6. Total general government financial assets, liabilities and net financial worth, 2000-16 Box 6.1. The Excessive Deficit Procedure in the European Union 3. Going into more detail Consolidation Table 6.4. Methods of consolidation Box 6.2. Differences and similarities between the SNA 2008 and GFSM 2014, with specific reference to financial accounts and balance sheets Table 6.5. Structure of the GFS presentation Some difficult cases potentially affecting the measurement of government deficit and related financial transactions Valuation and use of financial accounts and stocks Key Points Notes References Chapter 7. The financial relationships with the Rest of the World 1. A general overview Table 7.1. Overview of the accounts for the Rest of the World Figure 7.1. Current account for selected EU countries, 2005-16 2. The balance of payments and its relationship with national accounts Introducing the capital account Box 7.1. Saving, investments and the pivotal role of net lending/net borrowing National accounts versus balance of payments Table 7.2. Japanese balance of payments standard presentation (simplified), 2016 The international investment position Table 7.3. Japanese IIP summary presentation, Q4 2016 Box 7.2. IMF Balance of Payments and International Investment Position Statistics versus National Accounts’ Rest of the World accounts 3. The underlying components of non-financial and financial accounts The dynamics of current account deficits/surpluses Figure 7.2. Balance of payments for selected stressed EU countries, 2005-16 Figure 7.3. Savings and investment for selected stressed EU countries, 2005-15/16 Figure 7.4. Current and capital accounts and GDP growth for selected stressed EU countries, 2005-16 Current and capital accounts versus financial flows Figure 7.5. Current and capital accounts and financial accounts for selected stressed EU countries, 2005-16 Current and capital accounts sustainability and foreign exposures Figure 7.6. Portuguese general government gross external debt position by original maturity, 2009-16 Figure 7.7. Gross and net external debt for selected EU countries, 31 December 2016 Figure 7.8. Net external debt* and IIP for selected EU countries, 31 December 2016 Figure 7.9. FDI liabilities in OECD selected countries by type of entity, 2015-16 Figure 7.10. Gross external debt change for selected EU countries, 2016 Some concluding remarks on sustainability of foreign exposures Key points Going further Net errors and omissions Figure 7.11. Balance of payments’ internal consistency indicator for Portugal, 2006-16 Notes References Chapter 8. A full accounting for wealth: Including non-financial assets 1. General introduction to financial and non-financial wealth The sequence of accounts and the recording of non-financial assets The delineation of non-financial assets A comprehensive balance sheet Table 8.1. A comprehensive balance sheet for Australia and France, 2015 2. Specificities of non-financial assets, including their measurement Table 8.2. Non-financial assets, by type of asset, France Legal ownership versus economic ownership Valuation of non-financial assets Figure 8.1. Land underlying dwellings estimated with direct and residual method, Finland, 1985-2011 3. Who owns wealth: distribution across institutional sectors Distribution of wealth across sectors Figure 8.2. Distribution of net worth across institutional sectors, France Non-financial corporations’ non-financial assets and net worth Table 8.3. Non-financial assets of non-financial corporations, by type of asset, Australia and France, 2015 Table 8.4. Net worth of non-financial corporations, Australia and France General government’s non-financial assets Table 8.5. Non-financial assets of the government sector, 2015 Households’ non-financial assets and related indebtedness Figure 8.3. Dwellings (including underlying land) versus mortgage loans 4. Accumulation and de-accumulation of wealth Figure 8.4. Development of net worth in France, 1995-2015 Figure 8.5. Gross investments in non-financial assets, OECD, 1996-2015 5. Macro and micro: extending the system of national accounts Figure 8.6. Wealth inequalities/indebtedness across household groups Key points References Chapter 9. Accounting for the financial consequences of demographic changes 1. The effect of demographic changes on household saving and wealth Figure 9.1. Life cycle hypothesis in theory Figure 9.2. Saving ratio per age group for Australia Figure 9.3. Wealth according to age group in Australia, 2013/14 Figure 9.4. Dependency ratio and saving ratio in Japan Box 9.1. Demographic changes Figure 9.5. Demographic changes for OECD countries, 1950-2050 2. Demographic changes and government finances Table 9.1. Changes in age-related spending, 2000-50 Figure 9.6. Dependency ratio: population in retirement age (65+) to working age population (20-64) Figure 9.7. Projections of public sector primary balance and net debt for the United Kingdom 3. Demographic changes and pension schemes Types of pension schemes Table 9.2. Overview of the various classifications of pension schemes The measurement of pension entitlements Table 9.3. Sensitivity of the estimates of pension obligations for Portugal Table 9.4. Actuarial balance sheet for the Canada Pension Plan at 31 December 2012 The recording of pension entitlements in the 2008 SNA Table 9.5. The recording of pension schemes based on the sponsor and type of scheme Pension schemes and the interpretation of government debt Table 9.6. Pension systems and their impact on government debt, 2012 Retirement resources of households Figure 9.8. Household assets and liabilities per capita in USD, 2013 * Key points Note References Chapter 10. Globalisation, financial innovation and crises 1. Introduction 2. Countries’ fragilities and international crises The external financing of sectoral imbalances Box 10.1. The link between the current account balance and the resident economy Figure 10.1. US current account, saving minus investments of the private sector and government, 1960-2017 Trigger of current account crises Box 10.2. Assessing external debt sustainability Figure 10.2. US external position, 1976-2015 International finance and contagion effects beyond balance of payments crises Box 10.3. The 2007-09 economic and financial crisis and its consequences – Main episodes 3. Assessing the build-up of financial risks in a globalised world Sovereign debt, banking crises, and the impact of globalisation A framework for assessing the build-up of vulnerabilities during financial cycles Figure 10.3. Financial and business cycles in the United States, 1970-2016 International finance adding fuel to the fire? Figure 10.4. USD credit to non-banks outside the United States Figure 10.5. The relationship between financial markets volatility and international bank credit, 1978-2016 4. Analysing the impacts of leverage and financial innovation on economic growth and policy The central role played by leverage Figure 10.6. Private and public debt patterns before and after the 2007-09 economic and financial crisis, 2002-15 Financial innovation and the need to address complexity Figure 10.7. Two types of financial intermediation chains Impact of financial crises on growth Policy implications Table 10.1. Fiscal Cost of Banking Crises Figure 10.8. Policy rates and central bank assets: Euro Area, Japan and United States, 2007-17 5. Integrating micro information in the financial accounts perspective The legacy of the 2007-09 economic and financial crisis: greater institution-level supervisory requirements Table 10.2. Basel Committee on Banking Supervision reforms Basel III The impact of globalisation and the need for corporate group-level information How can micro-data help? 6. Addressing the information gaps highlighted by the 2007-09 economic and financial crisis The detailed monitoring of global systemically important institutions (G-SIFIs) Table 10.3. Allocation of the Global Systemically Important Banks and required levels of additional capital buffers (as of November 2016) Box 10.4. The collection of data on global systemically important institutions in the BIS-hosted International Data Hub The G20 Data Gaps Initiative Key points Going further Recommendations of the DGI-2 Notes References Chapter 11. Financial accounts uses 1. Annual versus quarterly financial accounts and balance sheets Annual accounts as an intermediate step towards quarterly accounts Box 11.1. Uses of financial accounts and balance sheets in the Euro Area: households Figure 11.1. Financial investments of households in the Euro Area, 2002-17 Figure 11.2. Accumulation of households’ net assets: changes in household net worth, 2002-17 The 2007-09 economic and financial crisis and the increased need for quarterly accounts Box 11.2. Uses of financial accounts and balance sheets in the Euro Area: non-financial corporations and financial institutions Figure 11.3. External financing of non-financial corporations in the Euro Area, 2002-17 Figure 11.4. Capital position of the financial corporations’ sector (excluding investment funds) in the Euro Area, 1999-2017 “From-whom-to-whom” breakdowns and network analysis tools Further exploitation of micro-data and distributional household accounts 2. The use of financial accounts to assess financial stability The EU Macroeconomic Imbalances Procedure Figure 11.5. MIP: Private sector debt (consolidated) in European countries,* 2011 and 2015 Figure 11.6. MIP Private sector credit flow (consolidated) in European countries,* 2012-15 The analysis of financial stability in the IMF Balance Sheet Approach Table 11.1. Balance sheet matrix Box 11.3. The balance sheet approach in Thailand Detecting imbalances through the financial accounts and balance sheets Figure 11.7. Financial accounts and balance sheets: Large Euro Area countries Figure 11.8. Financial accounts and balance sheets: Large non-Euro Area countries Figure 11.9. Financial accounts and balance sheets: small Euro Area countries Figure 11.10. Other financial intermediaries Rebalancing mismatches after the 2007-09 economic and financial crisis The policy use of sectoral indicators 3. Uses of financial accounts and balance sheets in economic research Money demand, asset portfolios, and econometric models: Tobin’s contribution The fall of financial accounts and balance sheets and the work of Godley Comparing financial systems and building balance sheets: Goldsmith’s contribution Table 11.2. Financial liabilities of financial corporations as a ratio of total financial liabilities, 2015 How Thomas Piketty studied the wealth/income ratios Table 11.3. Household wealth: ratios to GDP, 2013 The reassessment of interactions between the real economy and the financial sector Key points Notes References